Session 3: Tax Uncertainty and Corporation Compliance · Moderator: John Guyton IRS, RAS, ... The Effect of CAP on Tax Aggressiveness ... Tax Uncertainty and Corporation Compliance

Advancing Tax Administration June 19, 2014

Session 3: Tax Uncertainty and Corporation Compliance

Moderator: John Guyton IRS, RAS, Office of Research

Large Corporation Schedule M-3 Book-to-Tax

Profiles of Schedule UTP (Uncertain Tax

Position) Filers and Non-Filers: 2010 – 2011

Lisa Rupert

IRS, Large Business & International

Unintended Consequences of Linking Tax

Return Disclosures of Tax Uncertainty to

Financial Reporting for Tax Uncertainty

Erin M. Towery

University of Georgia

The Effect of CAP on Tax Aggressiveness Andrew Duxbury

University of Connecticut

Discussant: Matt Smith Department of the Treasury,

Office of Tax Analysis

Schedule M-3 Profile of Schedule UTP Filers

and Non-filers

IRS Research Conference Extract

from Boynton-DeFilippes-Legel-

Rupert Paper on “Large Corporation

M-3 Profile of UTP Filers and Non-

filers for 2010-2011 Tax Years”

June 2014

THE OPINIONS EXPRESSED ARE THOSE OF THE

AUTHORS AND DO NOT NECESSARILY REPRESENT

POSITIONS OF THE U.S. DEPARTMENT OF THE

TREASURY OR THE INTERNAL REVENUE SERVICE.

3

Agenda

History of Schedule UTP and Background

2010 - 2011 M-3 Data for UTP Filers and Non-filers

2010 - 2011 UTP and M-3 Data Design

2010 - 2011 Summary

4

HISTORY OF SCHEDULE UTP AND

BACKGROUND

5

Schedule UTP Background

Introduced

In 2010 for corporations with assets of $100M or more with audited Financial

Statements (FS) reporting uncertain tax positions in the income tax footnote

and for certain related corporations

Purpose

To report some of the information from the FS income tax footnote

Goal

To increase transparency

Income Tax Footnote

Required by U.S. generally accepted accounting principles (GAAP) under

FAS 109 (ASC 740) and FIN 48 (ASC 740-10)

6

Schedule UTP Requirements

Schedule UTP requires taxpayers to report:

Positions that affect the U.S. federal income tax liabilities of certain

corporations that issue or are included in audited FS

Relevant code sections

A concise description of the issue(s)

Dollar amounts are NOT required

The corporate asset reporting threshold:

Assets of $100M or more in tax years 2010 and 2011

$50M or more in tax years 2012 and 2013

$10M or more in tax years ending December 31, 2014 or later

7

Schedule UTP Reports the federal uncertain tax positions reserved on the FS with respect to items

on the tax return the IRS may challenge on audit

Generally relates to items reported on Schedule M-3 Parts II and III, tax credit

amounts, and international issues reported on Forms 1118, 5471s, 5472s, etc.

Schedule M-3 Part I reconciles worldwide consolidated book income to the book income reported

on the consolidated tax return

Parts II and III report the temporary and permanent adjustments from the various

book income and expense items to the income and expense amounts for tax

purposes

Schedule M-3 (M-3) and Schedule UTP (UTP) are complementary sources of

taxpayer information

8

Schedule UTP Comparison with Schedule M-3

2010-2011 M-3 DATA FOR UTP FILERS AND

NON-FILERS

9

2010 (2011) M-3 Data for Form 1120 Corporations

40,740 (41,636) corporations in 2010 (2011)

12,044 (12,307) corporations have total assets of $100M and potentially subject to UTP

By FS Type

3,446 (3,370) with SEC 10K/Public FS

5,218 (5,396) with Audited FS

3,380 (3,540) are Unaudited

10

2010 and 2011 UTP Filers

All filers

2010 - 1,856 (15.4%) and 2011 - 2,074 (16.9%)

SEC 10K/Public corporations

2010 - 1,093 (31.7%) and 2011 - 1,227 (36.4%)

Audited corporations

2010 - 493 (9.4%) and 2011 - 535 (9.9%)

Unaudited corporations

2010 - 269 (8.0%) and 2011 - 311 (8.8%)

11

UTP AND M-3 DATA DESIGN

12

2010 - 2011 UTP and M-3 Data Design

2010 - 2011 UTP and M-3 Tables

Distinguish UTP filer versus UTP non-filer by FS types

• Non-filers include both those not required to file and those who fail to file

$100M or more in assets

Adjusted 2010 - 2011 M-3 Parts II and III Data

Seven specified versus other-differences categories

For book income, tax income, and Book-Tax-Difference (BTD)

amounts

By FS type (SEC 10K/Public, Audited, and Unaudited)

By the presence or absence of Schedule UTP

13

Special Adjustments to Three M-3 Lines

Cost of Goods Sold (COGS) is adjusted to remove the cost of securities/commodities reported on Schedule A using SOI data

Other-income-items-with-differences is adjusted to remove Gross Receipts related to the COGS adjustment

Other-items-with-no-differences is adjusted to remove Gross Receipts related to the COGS adjustment

Other-items-with-no-differences is adjusted to remove expenses/deductions-with-no-differences creating two lines:

Adjusted Other income with no differences

Adjusted Other expense/deduction with no differences

14

2010 - 2011 SUMMARY TABLES:

COMPARISONS OF FS TYPES FOR UTP

FILERS AND NON-FILERS WITH

SIGNIFICANT M-3 BTD

15

Categories in Summary Tables

By FS and UTP for filers and non-filers M-3 categories with BTD

• Adjusted COGS

• Specified Income

• Adjusted Other Income with differences

• Specified Expense/Deduction

• Adjusted Other Expense/Deduction with differences

Other items

• Pretax income

• Tax Net Income

• BTD

• Increase or Decrease to Taxable Income

16

Notes for Summary Tables

UTP filers and non-filers with $100M or more in assets by FS

types

Significant BTD exceeding 1.5% of adjusted total book

income

BTD signs are positive and negative

Negative BTD reduce taxable income compared to book income

Table indicates significant BTD as T for Temporary and P for

Permanent

Red indicates negative BTDs and reductions in taxable

income

17

Significant BTD Exceeding 1.5% of Adjusted Total Book Income for

Public Corporations

FS TYPE 2010 SEC 2011 SEC

Filer NonFiler Filer NonFiler

COGS -- +1.90T -- -1.54T

Spec Inc -2.99T -3.46P -2.02T --

Oth Inc -1.52P -2.89T -- --

SpecExp -- -1.94T -- -3.74T

Oth Exp -- -- -- --

Pretx Inc 17.88 16.75 17.82 12.04

Tax Inc 12.91 10.52 14.18 7.17

Total BTD -4.97 -6.23 -3.64 -4.87

Inc/Decr -27.8 -37.2 -20.4 -40.5

18


Audited Corporations

FS TYPE 2010 Audited 2011 Audited


COGS +2.17T -- +2.12T --

Spec Inc +1.67T

-1.95P

-- +1.57T

-2.31P

--

Oth Inc -2.72T -- -2.35T --

SpecExp +1.54P -1.61T -5.95T

+2.30P

-2.35T

Oth Exp +3.51T -- -- --

Pretx Inc 5.58 6.98 10.72 7.73

Tax Inc 9.21 4.90 5.70 4.05

Total BTD +3.63 -2.08 -5.03 -3.67

Inc/Decr +65.1 -29.8 -46.9 -47.6

19


Unaudited Corporations

FS TYPE 2010 Unaudited 2011 Unaudited


COGS -- -- -- --

Spec Inc +1.85T

+3.66P

-3.74P +4.13P --

Oth Inc -- -- -- --

SpecExp +1.70P -1.86T -2.40T

-2.87T

Oth Exp -- -- 1.58P 26.50T

Pretx Inc 4.84 13.53 5.63 -23.09

Tax Inc 10.81 4.81 10.19 3.23

Total BTD +5.98 -8.72 +4.57 +26.33

Inc/Decr +123.6 -64.5 +81.2 +114.0

20

Thank you!

For more information contact:

[email protected]

[email protected]

[email protected]

Unintended consequences of linking tax return disclosures of tax uncertainty to financial

reporting for tax uncertainty

Erin Towery University of Georgia

IRS Research Conference

June 19th, 2014

Research question Broad: How do tax return disclosures linked to financial

reporting disclosures affect firms’ reporting decisions?



Specific: How does Schedule UTP affect:

oTax reporting decisions

oFinancial reporting decisions



Specific: How does Schedule UTP affect:

oTax reporting decisions

oFinancial reporting decisions

Uncertain tax position: A position, such as a deduction or a credit, that might not be sustained if challenged by the tax authority.

Schedule UTP

2007 2008 2009 2010

Annual Report(public)

Tax Return(confidential)

Schedule UTP

2007 2008 2009 2010



Disclose reserves for uncertain

tax positions

Reserves aggregated across jurisdictions

Schedule UTP

2007 2008 2009 2010



Disclose reserves for uncertain

tax positions

Descriptionof federaluncertain

tax positions

Reserves aggregated across jurisdictions

Must disclose description, but not magnitude

Motivation & Contribution Abernathy et al. (2012) & Ferraro (2012) document decrease

in reserves for UTBs in Schedule UTP regime o Confidential corporate tax return data uniquely enable me to disentangle tax and

financial reporting decisions




Linking tax return disclosures to financial reporting disclosures can distort financial reporting decisions




Linking tax return disclosures to financial reporting disclosures can distort financial reporting decisions

Tax disclosure initiatives increasingly common

Predictions

Benefits if undetected

VS. Costs if

detected

Predictions


VS. Costs if

detected

Schedule UTP

increases risk of IRS detection

Predictions


VS. Costs if

detected

Schedule UTP


Decrease in tax

uncertaintyH1

Predictions


VS. Costs if

detected

Schedule UTP


Decrease in tax

uncertaintyH1

No effect on tax

uncertainty

H1 Change in financial

reporting for tax

uncertainty

H2

Model

o Sample: Firm-years from 2007-2011 with F/S and tax return data

oPre versus post; Treatment versus non-treatment

Research design

FederalTaxPaid / TaxReserves = β0 + β1*UTPRegimeInd + β2*UTPFirmInd + β3*UTPRegimeInd*UTPFirmInd + Controls + FE

Model

o Sample: Firm-years from 2007-2011 with F/S and tax return data

oPre versus post; Treatment versus non-treatment

Dependent variables

oFederalTaxPaid: Federal taxes paid from tax return

oTaxReserves: Current year increases in tax reserves

Research design

FederalTaxPaid / TaxReserves = β0 + β1*UTPRegimeInd + β2*UTPFirmInd + β3*UTPRegimeInd*UTPFirmInd + Controls + FE

Composition of UTBs

<5 <5 <5 <5 <5 <5 <5 <5

0

50

100

150

200

250

Nu

mb

er o

f U

nce

rta

in T

ax

Po

siti

on

s

Category of Uncertain Tax Position

Panel A, Categories of uncertain tax positions

Permanent BTD

Temporary BTD

Perm & Temp BTD

Composition of UTBs

<5 <5 <5 <5 <5 <5 <5

0

50

100

150

200

250

Nu

mb

er o

f U

nce

rta

in T

ax

Po

siti

on

s

Industry

Panel B, Uncertain tax positions by industry

Permanent BTD

Temporary BTD

Perm & Temp BTD

Effect of Schedule UTP

Intercept 0.4365 *** -0.0437 *** 0.4393 *** -0.0429 ***

(0.0319) (0.0047) (0.0335) (0.0051)

UTPRegimeInd -0.0235 *** -0.0037 *** -0.0021 0.0001

(0.0033) (0.0005) (0.0114) (0.0016)

UTPFirmInd 0.0224 * 0.0043 **

(0.0121) (0.0017)

UTPRegimeInd*UTPFirmInd -0.0237 ** -0.0041 **

(0.0119) (0.0017)

Controls

N

R-squared 0.1279 0.1071 0.1288 0.1084

5,121 5,121 5,121 5,121

DV: Federal

TaxPaid

DV: Tax

Reserves

DV: Federal

TaxPaid

DV: Tax

Reserves


Intercept 0.4365 *** -0.0437 *** 0.4393 *** -0.0429 ***

(0.0319) (0.0047) (0.0335) (0.0051)

UTPRegimeInd -0.0235 *** -0.0037 *** -0.0021 0.0001

(0.0033) (0.0005) (0.0114) (0.0016)

UTPFirmInd 0.0224 * 0.0043 **

(0.0121) (0.0017)


(0.0119) (0.0017)

Controls

N

R-squared 0.1279 0.1071 0.1288 0.1084

5,121 5,121 5,121 5,121

DV: Federal

TaxPaid

DV: Tax

Reserves

DV: Federal

TaxPaid

DV: Tax

Reserves


Intercept 0.4365 *** -0.0437 *** 0.4393 *** -0.0429 ***

(0.0319) (0.0047) (0.0335) (0.0051)

UTPRegimeInd -0.0235 *** -0.0037 *** -0.0021 0.0001

(0.0033) (0.0005) (0.0114) (0.0016)

UTPFirmInd 0.0224 * 0.0043 **

(0.0121) (0.0017)


(0.0119) (0.0017)

Controls

N

R-squared 0.1279 0.1071 0.1288 0.1084

5,121 5,121 5,121 5,121

DV: Federal

TaxPaid

DV: Tax

Reserves

DV: Federal

TaxPaid

DV: Tax

Reserves

Intercept 0.4154 *** -0.0295 ***

(0.0502) (0.0075)

UTPRegimeInd -0.0248 *** -0.0032 ***

(0.0043) (0.0007)

CICInd -0.0072 0.0036 **

(0.0093) (0.0015)

UTPRegimeInd*CICInd -0.0058 -0.0024 *

(0.0073) (0.0012)

Controls

N

R-squared

4,579 4,579

0.1291 0.109

DV: Federal

TaxPaid

DV: Tax

Reserves

CIC versus Non-CIC

Intercept 0.4154 *** -0.0295 ***

(0.0502) (0.0075)

UTPRegimeInd -0.0248 *** -0.0032 ***

(0.0043) (0.0007)

CICInd -0.0072 0.0036 **

(0.0093) (0.0015)

UTPRegimeInd*CICInd -0.0058 -0.0024 *

(0.0073) (0.0012)

Controls

N

R-squared

4,579 4,579

0.1291 0.109

DV: Federal

TaxPaid

DV: Tax

Reserves

CIC versus Non-CIC

Results robust to:

o Changes specification

o Including measure of earnings management in model

o Quantile regression

o Holding sample constant over time period

o Removing firms with large consolidation differences

o Alternative winsorization levels

o Holding GAAP pretax income constant

Sensitivity analyses

Use confidential corporate tax return data and public financial statement data to investigate the effect of Schedule UTP on reporting decisions

Conclusion

Use confidential corporate tax return data and public financial statement data to investigate the effect of Schedule UTP on reporting decisions

Results suggest firms found ways to avoid recording reserves to avoid disclosing positions on Schedule UTP

oLinking tax return disclosures to financial reporting disclosures can distort financial reporting decisions

Conclusion

The Effect of CAP on Tax Aggressiveness

Amy Dunbar and

Andrew Duxbury


School of Business

What is CAP?

• Collaborative process to identify and resolve

potential issues before the tax return is filed

• IRS goal is to conduct and efficient and focused audit

• Began in 2005 and made permanent in 2011

49

Research Question

• Are CAP taxpayers more compliant before admission

to CAP?

• Do they become more compliant after admitted?

Compliance is difficult to measure

We use the opposite of compliance - tax

aggressiveness

50

Motivation

• GAO has recommended a CAP evaluation to

determine effectiveness

• If effective, expansion can result in more efficient use

of IRS resources

• If ineffective, specific goals can be defined

51

Who can be in CAP?

• Assets at least $10M

• Public entity with SEC financials

• Not be in litigation with government agency

• Transparent and cooperative with IRS

52

Who does the IRS select?

• Did the IRS choose tax “angels”?

• Do firms become more “angelic” after entering CAP?

• Research Design:

Use a matched sample of CAP and nonCAP firms

Compare proxies for tax aggressiveness

53

CAP Benefits

• Benefits IRS

Lowers cost of audits

Voluntary compliance

Early ID of emerging Issues

• Benefits Taxpayers

Certainty Sooner

Reduces F/S Risk

54

Prior Research

• Strategic Game Graetz, Reinganum and Wilde (1986)

• Voluntary disclosure Penalty Protection (Beck, Davis and Jung 2000)

If detection is high, taxpayers will be transparent (DeSimone,

Sansing, and Seidman 2013)

• Beck and Lisowsky (2014) Moderate sized FIN 48 reserves are more likely to participate

Moderate sized reserve balances decreased

55

Descriptive Statistics – Firm Characteristics: 2004-2012

CAP NonCAP

N mean N mean SIZE 979 9.108 1421 8.861

FOREIGN 979 0.529 1421 0.602

CFO 978 0.100 1421 0.108

ROA 979 0.008 1421 -0.020

NOL 979 0.381 1421 0.480

Leverage 973 0.216 1419 0.194

MTB 956 4.096 1358 3.531

RD 979 0.013 1421 0.015

CAPINT 952 0.571 1308 0.544

INTAN 969 0.198 1412 0.205 56

Firm Characteristics

• CAP firms are larger and more leveraged

• CAP firms are – as expected: Lower foreign income percent

Lower cash flow

• CAP firms are – as not expected Higher ROA

Lower NOL

Higher Capital Intensity

57

Tax Aggressiveness Measures: 2004-2012

CAP NonCAP

N mean N mean ETR 368 0.314 645 0.308 CETR 368 0.297 645 0.294 TXWW_ETR 368 0.273 645 0.270 TXFED_ETR 368 0.272 645 0.299 TXFO_ETR 362 0.312 619 0.274

CashETR 365 0.254 643 0.253 LRCashETR 290 0.257 495 0.26 BTD 213 0.035 419 0.035 PBTD 213 0.027 419 0.03 UTB 226 0.009 398 0.014 UTB-ETR 226 0.006 398 0.011

58

2007 2010

NonCAP 139 0.012 NonCAP 160 0.011

CAP 95 0.011 CAP 110 0.008

CAP years 42 0.009 CAP years 86 0.007

2008 2011

NonCAP 160 0.012 NonCAP 156 0.011

CAP 110 0.01 CAP 110 0.006

CAP years 66 0.01 CAP years 108 0.006

2009 2012

NonCAP 160 0.012 NonCAP 152 0.011

CAP 110 0.01 CAP 105 0.01

CAP years 79 0.009

CAP/NonCAP Sample UTB

59

Tax Aggressiveness

• CAP firms have lower federal but higher foreign

ETRs compared to nonCAP firms

• CAP firms have lower UTBs and UTB-ETR than

non-CAP

• Overall, univariate results suggest that CAP firms are

similar to but perhaps slightly less aggressive than

nonCAP firms.

60

CFCs versus Disregarded Entities

61

Tax Havens: 2006-2012

CAP NonCAP

Countries Big 7 Dots Dyreng Big 7 Dots Dyreng

Cayman Islands 1,636 1,636 1,574 1,574

Bermuda 997 997 692 692

Hong Kong 807 1,891 5,673

Singapore 693 693 693 1,673 0 1,673

Switzerland 552 552 552 1,450 0 1,450

Ireland 461 461 461 1,121 0 1,121

Luxembourg 441 441 861 861

Haven Percent 9.1% 19.5% 19.5% 8.5% 13.5% 13.3% 62

Tax Havens

• CAP firms have substantially more subsidiaries in dot

havens and Dyreng and Lindsay tax havens

• CAP firms have higher ETR in tax haven countries

and lower tax rates in non-haven countries

• Less aggressive income shifting?

63

Multivariate Results:

Estimates of Tax Rates on Pretax Income

TXWW TXFED TXFO

PI/PIDOM/PIFO 0.2843 0.3068 0.2109

CAP 0.001 -0.0009 0.0007

PI/PIDOM/PIFO

*CAP 0.013 -0.0107 0.0358

SIZE -0.0008 -0.0002 -0.0002

FOREIGN -0.0014 -0.0004 0.0014

NOL -0.0024 -0.0024 0.0002

Leverage -0.0047 -0.0048 0.0007

MTB 0.0001 0.0001 0.0000

RD -0.0411 0.0183 -0.0149

CAPINT -0.0015 -0.0052 0.0018

INTAN -0.0011 -0.0048 0.0014

64

Multivariate Results

• Inconclusive results

• Higher tax rates on foreign income

Suggests CAP firms engage in less income shifting

Mitigates incentive to shift income out of the U.S.

• RD is negative for foreign and positive for domestic

Suggests CAP offshore less IP

65

Conclusion

• Descriptive statistics indicate that CAP firms are may

be more compliant than non-CAP firms

• CAP firms have more tax haven subsidiaries

But they have higher ETRs which suggest they shift

less income

• Multivariate results suggest CAP firms may engage

in less income shifting

66

Discussion

Matt Smith Office of Tax Analysis

US Dept of Treasury

CAP & Tax Aggressiveness

• Are CAP firms less tax aggressive?

– Mixed evidence: tax haven activity vs ETR

– Domestic ETR is unaffected

– Propensity to identify income as domestic?

CAP & Tax Aggressiveness

• Does CAP change firm behavior?

• Options:

• Pre/post summary stats

• Difference -in-difference

• Interesting question: do firms dispose of CFCs and foreign disregarded entities?

Uncertain Tax Positions

• FIN 48 (2007) & Schedule UTP (2010)

• Towery: Does schedule UTP influence financial reporting?

• Boynton, Rupert, et al.: Does schedule UTP help identify tax aggressive firms?

Yes and No

Towery:

• Main results:

– Financial reported tax reserves decrease in response to UTP requirements

– Tax aggressiveness does not decrease in response to UTP requirements.

– Does tax aggressiveness increase?

• ETR measure: federal tax / book income

• mechanical change in income due to fewer reserves?

Towery

Potential updates:

• Discontinuity design: compare firms just above and below threshold of $100 million

• Link between tax reserves and tax aggressiveness for 2007-2009.

• Meaningful intercepts

Boynton, Rupert, et al.

Main Findings

• Schedule UTP filers are no more likely to reduce taxable income through BTDs

• In 2010, UTP filers less likely to reduce taxable income through BTDs.

Boynton , Rupert, et al.

Remaining Questions:

• Relationship between UTP filing and BTD by line item. – Do UTP filers identify items with large BTD as uncertain

benefits?

• UTP and domestic vs foreign income. – Does UTP help identify income that should be attributed

to tax entity? Or identified as domestic?

Advancing Tax Administration June 19, 2014

Session 3: Tax Uncertainty and Corporation Compliance

Moderator: John Guyton IRS, RAS, Office of Research

Large Corporation Schedule M-3 Book-to-Tax

Profiles of Schedule UTP (Uncertain Tax

Position) Filers and Non-Filers: 2010 – 2011

Lisa Rupert

IRS, Large Business & International

Unintended Consequences of Linking Tax

Return Disclosures of Tax Uncertainty to

Financial Reporting for Tax Uncertainty

Erin M. Towery

University of Georgia

The Effect of CAP on Tax Aggressiveness Andrew Duxbury


Discussant: Matt Smith Department of the Treasury,

Office of Tax Analysis

Documents

Session 3: Tax Uncertainty and Corporation Compliance · Moderator: John Guyton IRS, RAS, ... The Effect of CAP on Tax Aggressiveness ... Tax Uncertainty and Corporation Compliance